Understanding Capital Gains In Real Estate

When you sell a home, you owe taxes on your gain-- the difference between what you paid for the home and what you sold it for. But there are some special considerations.

How to Calculate Gain

In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:

1. Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.
2. Add adjustments

• Cost of purchase--including transfer fee, attorney fee, impections, but not points you paid on the mortgage.
• Cost of sale--including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
• Cost of improvements--including room additions, deck, etc. Not here that improvements do not include repairing replacing something already there, such as putting on a new roof or buying a new mechanical unit.

   3.  The total of this is the adjusted cost basis of your home. 

   4. Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.

A Special Real Estate Exemption for Capital Gains

Since 1997, up to $250,000 in capital gains or $500,000 for a married couple on the sale of a home is exempt from taxation if you meet the following criteria:

• You have lived in the home as your principal residence for two out of the last five years.
• You have not sold or exhanged another home during the two years preceding the sale.